Chapter 5 Accounting for Merchandising Operations ( 買賣業的會計處理 )

Chapter 5 Accounting for Merchandising Operations(買賣業的會計處理 )

Instructor: Chih-Liang Julian Liu

Department of Industrial and Business Management

Chang Gung University

Chapter 5

Learning Objectives

1. Identify the differences between service and

merchandising companies.

2. Explain the recording of purchases under a

perpetual inventory system (永續盤存制 ).

3. Explain the recording of sales revenues under a

perpetual inventory system.

4. Explain the steps in the accounting cycle (會計循環 ) for a merchandising company.

5. Prepare an income statement for a merchandiser.

Preview of Chapter 5

Merchandising Companies

Buy and Sell Goods

Wholesaler (批發商 ) Retailer (零售商 ) Consumer (消費者 )

The primary source of revenues is referred to as sales revenue or sales.

Merchandising Operations

Income Measurement

Illustration 5-1

Cost of goods sold is the total

cost of merchandise sold during

the period.

Not used in a

service business.


The operating cycle

of a merchandising

company ordinarily

is longer than that

of a service

company.

Illustration 5-2Operating Cycles


Illustration 5-3

Companies use either a perpetual inventory system or a periodic inventory system to account for inventory.

Illustration 5-4

Merchandising OperationsFlow of Costs

Perpetual System (永續盤存制 )

Maintain detailed records of the cost of each inventory purchase and sale.

Records continuously show inventory that should be on hand.

Company determines cost of goods sold each time a sale occurs.


Periodic System (定期盤存制 )

Beginning inventory

$ 100,000

Add: Purchases, net

800,000

Goods available for sale

900,000

Less: Ending inventory

125,000

Cost of goods sold

$ 775,000


Do not keep detailed records of the goods on hand.

Cost of goods sold determined by count at the end of the accounting period.

Calculation of Cost of Goods Sold:

Additional Consideration

Perpetual System:

Traditionally used for merchandise with high

unit values.

Provides better control over inventories.

Requires additional clerical work and additional

cost to maintain inventory records.


Wholesaler (Seller)

Retailer (Buyer)

Consumer

Sauk Stereo

PW AudioSupply


Made using cash or credit (on account). Illustration 5-6

Normally recorded when

goods are received.

Purchase invoice should

support each credit

purchase.

Recording Purchases of Merchandise

Illustration: Sauk Stereo (the

buyer) uses as a purchase

invoice the sales invoice

prepared by PW Audio Supply,

Inc. (the seller). Prepare the

journal entry for Sauk Stereo

for the invoice from PW Audio

Supply.

Inventory 3,800May 4

Accounts payable 3,800

Illustration 5-6

PERPETUAL INVENTORY SYSTEM

Purchases 3,800May 4

Accounts payable 3,800

PERIODIC INVENTORY SYSTEM


Illustration 5-7 Shipping terms

Seller places goods Free On Board the carrier, and buyer

pays freight costs.

Seller places goods Free On Board to the buyer’s place of

business, and seller pays freight costs.

Freight Costs (運費 ) – Terms of Sale

Freight costs incurred by the seller are an operating expense.


Illustration: Upon delivery of the goods on May 6, Sauk Stereo (the buyer) pays Acme Freight Company €150 for freight charges, the entry on Sauk Stereo’s books is:

Inventory 150May 6

Cash 150

In contrast, if the freight terms on the invoice had required PW Audio Supply (the seller) to pay the freight charges, the entry by PW Audio Supply would have been:

Freight-out (Delivery expense) 150May 4

Cash 150


Freight-in (Transportation-in) 150May 6

Cash 150

Freight Costs

LO 6 Explain the recording of purchases and sales of inventory under a periodic inventory

system.


Comparison of Entries—Perpetual Vs. Periodic

Illustration 5A-3

APPENDIX 5A PERIODIC INVENTORY SYSTEM

Purchaser may be dissatisfied because goods are damaged or

defective, of inferior quality, or do not meet specifications.

Purchase Returns and Allowances (進貨退出及折讓 )

Return goods for credit if the

sale was made on credit, or

for a cash refund if the

purchase was for cash.

May choose to keep the

merchandise if the seller will

grant an allowance

(deduction) from the purchase

price.

Purchase Return Purchase Allowance


Illustration: Assume that on May 8 Sauk Stereo

returned to PW Audio Supply goods costing €300.

Accounts payable 300May 8

Inventory 300


Accounts payable 300May 8

Purchase returns and allowances 300

Purchase Returns and Allowances



Illustration 5A-3


Credit terms may permit buyer to claim a cash

discount (現金折扣 ) for prompt payment (提早付現 ).

Advantages:

Purchaser saves money.

Seller shortens the operating cycle.

Purchase Discounts (進貨折扣 )


Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days.

2% discount if

paid within 10

days, otherwise

net amount due

within 30 days.

1% discount if

paid within first 10

days of next

month.

2/10, n/30 1/10 EOM

Net amount due

within the first 10

days of the next

month.

n/10 EOM

Purchase Discounts


Accounts payable 3,500May 14

Cash 3,430

Inventory 70

(Discount = €3,500 x 2% = €70)

Illustration: Assume Sauk Stereo pays the balance due of

€3,500 (gross invoice price of €3,800 less purchase returns and

allowances of €300) on May 14, the last day of the discount

period. Prepare the journal entry Sauk Stereo makes to record

its May 14 payment.


Accounts payable 3,500June 3

Cash 3,500

Illustration: If Sauk Stereo failed to take the discount, and

instead made full payment of €3,500 on June 3, the journal

entry would be:


Accounts payable 3,500May 14

Purchase discounts 70

Cash 3,430

Purchase Discounts



Illustration 5A-3


Inventory

Debit Credit

€3,800 8th - Return€300

Balance

4th - Purchase

€3,580

70 14th - Discount

Summary of Purchasing Transactions

1506th – Freight-in


Made using cash or credit (on account).Illustration 5-6

Normally recorded when

earned, usually when

goods transfer from seller

to buyer.

Sales invoice should

support each credit sale.

Recording Sales of Merchandise

Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Sales revenue XXX

#1

Cost of goods sold XXX

Inventory XXX

#2

Selling Price

Cost


Accounts receivable 3,800May 4

Sales revenue 3,800

Illustration: Assume PW Audio Supply records its May 4

sale of €3,800 to Sauk Stereo on account as follows.

Assume the merchandise cost PW Audio Supply €2,400.

Cost of goods sold 2,400

Inventory 2,400

May 4


No entry is recorded for cost of goods sold at the time of the sale under a periodic system.

Accounts receivable 3,800May 4

Sales revenue 3,800





Illustration 5A-3

“Flipside” of purchase returns and allowances.

Contra-revenue (收入減項 ) account (debit).

Sales not reduced because:

► Would obscure importance of sales returns and

allowances as a percentage of sales.

► Could distort comparisons.

Sales Returns and Allowances (銷貨退回與折讓 )


Illustration: Prepare the entry PW Audio Supply would make

to record the credit for returned goods that had a €300 selling

price (assume a €140 cost). Assume the goods were not

defective.

Sales returns and allowances 300May 8

Accounts receivable 300

Inventory 140

Cost of goods sold 140

May 8




Inventory 50


Illustration: Assume the returned goods were defective

and had a scrap value of €50, PW Audio would make the

following entries:

May 8




Sales Returns and Allowances




Illustration 5A-3

Offered to customers to promote prompt payment.

“Flipside” of purchase discount.

Contra-revenue (收入減項 ) account (debit).

Sales Discount (銷貨折扣 )


Cash 3,430May 14

Accounts receivable 3,500

Sales discounts 70

* [(€3,800 – €300) X 2%]

*

Illustration: Assume Sauk Stereo pays the balance due of

€3,500 (gross invoice price of €3,800 less purchase returns

and allowances of €300) on May 14, the last day of the

discount period. Prepare the journal entry PW Audio Supply

makes to record the receipt on May 14.


Sales Discounts

Cash 3,430May 14

Accounts receivable 3,500

Sales discounts 70




Illustration 5A-3

Generally the same as a service company.

One additional adjustment to make the records

agree with the actual inventory on hand.

Involves adjusting Inventory and Cost of

Goods Sold.

Completing the Accounting Cycle

Adjusting Entries

Illustration: PW Audio Supply has an unadjusted balance

of €40,500 in Inventory. Through a physical count, PW

Audio determines that its actual inventory at year-end is

€40,000. The company would make an adjusting entry as

follows.


Inventory500



Closing Entries


Closing Entries

Primary source of information for evaluating a

company’s performance.

Format is designed to differentiate between

the various sources of income and expense.

Income Statement

Forms of Financial Statements

Illustration 5-14

Income

Statement

Presentation

of Sales


Key Items:

Net sales

Income

Statement


Illustration 5-14

Key Items:

Net sales

Gross profit

Income

Statement


Illustration 5-14

Income

Statement

Key Items:

Net sales

Gross profit

Gross profit rate

Forms of Financial StatementsIllustration 5-14

Key Items:

Net sales

Gross profit

Operating

expenses

Income

Statement


Illustration 5-14

Key Items:

Net sales

Gross profit

Operating

expenses

Other income

and expense

Income

Statement


Illustration 5-14

Key Items:

Net sales

Gross profit

Operating

expenses

Other income and

expense

Interest expense

Income

Statement


Illustration 5-14

Key Items:

Net sales

Gross profit

Operating

expenses

Other income and

expense

Interest expense

Net income

Income

Statement

Forms of Financial StatementsIllustration 5-14

Comprehensive Income (綜合淨利 )

Includes certain adjustments to pension plan assets, gains and losses on foreign currency translation, and unrealized gains and losses on certain types of investments.

Reported in a combined statement of net income and comprehensive income, or in a separate schedule that reports only comprehensive income.

Illustration 5-15


Illustration 5-16

Classified Statement of Financial Position


Documents

Chapter 5 Accounting for Merchandising Operations ( 買賣業 的會計處理 )

Chapter 5 Accounting for Merchandising Operations ( 買賣業的會計處理 )